Economists' Commentary: Tumbling Off of the Trade-Up Tight Rope
October 27, 2008
By Ken Fears, Manager of Regional Economics 
The housing boom was an incredible opportunity for many first time homebuyers. However, owners also recognized the improved affordability which followed the sharp decline in mortgage rates and jumped in. As a result, trade-up homebuyers became a substantial portion of the demand that drove the boom. Now that the market is slowing, trade-up buyers are finding great bargains, but they are also finding it harder to sell their own home and unlock the equity critical to completing this maneuver. Trade-up buyers are now more likely to be forced to hold onto an empty home while their savings is depleted.
Between 2000 and 2005 the average 30-year fixed rate mortgage fell from 8.06 percent to 5.86 percent. This historical decline in rates caused monthly payments to fall and buyers to race into the market. First-time buyers were quick to get in the market and the homeownership rate rose from 67.4 percent to 68.9 percent over this 6-year period.
First-time buyers were not the only portion of the market to benefit from the decline in mortgage rates. Many owners realized the booming affordability had opened up an opportunity for them to move into larger, more updated, or better situated properties. As a result, trade up buying grew rapidly and their share of total home sales rose from 58 percent in 1999 to 60 percent by 2005. Of the repeat buyers surveyed in the National Association of Realtors' 2005 Profile of Home Buyers and Sellers, 29 percent cited the desire for more space or a larger home as their reason for buying, while 9 percent cited a desire for less space, and 12 percent bought a new home to be closer to a job, schools, relatives, or a transportation route. Regardless of the reason, the result was increased purchases and turnover.
Now that the market has slowed, homeownership for both first-time buyers as well as trade-up buyers is on the decline and many trade-up buyers have found themselves in a pinch. Having found a gem in what is now a buyers' market, they are stuck, unable to sell their old house in a market where days-on-market have doubled and even quadrupled in some markets and price concessions are the norm. Between 2000 and 2005, the vacancy rate on owner-occupied properties hovered between 1.6 and 1.7 percent. By 2007 the vacancy rate for owner occupied properties surged to 2.7. More recently, the homeownership rate rose again to 2.8 percent during the 2nd quarter of 2008 and it is likely to rise further as many would-be buyers have found access to credit cut off since late August. Regionally, Florida, Nevada and Arizona have the highest owner vacancy rates at 5.1 percent, 4.6 percent, and 3.1 percent, respectively.
Conversely, the vacancy rate on rental properties rose from 2000 and 2005 when buying often made more sense than renting. But the vacancy rate has fallen between 2005 through 2007, with the rise in mortgage rates and unstable housing prices. Surprisingly, the vacancy rate on rental properties has not continued to decline despite the continued slowdown in the housing market. Rather, the rate has risen from 9.5 percent in the second quarter of 2007 to 10.0 percent in the second quarter of 2008. Two factors might account for this surprising increase. First, more speculators, unable to sell their properties in the slow housing market, have opted to rent their properties, thus expanding the supply of rental properties relative to rented properties and renters. Second, the economic slowdown that took root back in late 2006 caused many people to lose their jobs and others to worry about a similar fate. In order to trim expenditures, many households have consolidated, living with friends or family under the same roof. The vacancy rates in Michigan, Alabama, and Delaware have surged to 17.0 percent, 15.3 percent, and 15.0 percent, respectively.
From 2005 through 2007, the housing market contraction was driven by rising foreclosures, but now the slowing economy is having an impact. Rising supply has made it harder for rent growth to maintain its traction, while the strong buyers' market has increased the angst among trade-up buyers who must now deal with longer days-on-market and softer prices, while waiting to complete their transactions. The current market poses new and unexpected challenges to both the rental and sales market. It will take time and a better understanding of pricing fundamentals of this new environment before the confidence that breeds balance can be restored.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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